Deloitte faces £6.5m fine over Serco Geografix audit failures

Deloitte has been fined £6.5m by the Financial Reporting Council (FRC) over its auditing of Serco Geografix Ltd, the company which has recently settled fraud and false accounting charges under a deferred prosecution agreement (DPA) with the Serious Fraud Office (SFO)

Following an investigation which opened in 2016, the FRC has imposed sanctions against Deloitte in relation to the audit of the financial statements of Serco Geografix for the years ended 31 December 2011 and 2012, and against its audit engagement partner, Helen George, in relation to the year ended 31 December 2011, after their admissions of misconduct.

Deloitte’s fine has been discounted for settlement to £4.23m and the firm has been severely reprimanded. It will also pay £300,000 towards the costs of the investigation.

George has been fined £150,000, discounted for settlement to £97,500, and been severely reprimanded.

In addition, Deloitte has arranged for all its audit staff to undergo a training programme designed to the satisfaction of the FRC aimed at improving the behaviour that is the subject of the misconduct.

The regulator found that Deloitte and George failed to act in accordance with the fundamental principle of professional competence and due care.  The terms of settlement and the particulars of fact and acts of misconduct are not published at this time.

For year end 2011, Deloitte earned £1.6m in audit fees and £500,000 in non-audit fees, which had risen to 2£1.8m in audit fees and £1m in non-audit services for year end 2012. Deloitte had been auditor since 2000. Subsequently in 2016, Serco Geografix put the audit business out to the market and KPMG won a competitive tender to take over the audit of the business, with year end 2016 the first audit for the Big Four firm.

The SFO’s DPA with Serco Geografix arose from a scandal in the provision of electronic tagging services to the Ministry of Justice (MoJ).

Under the deal, the company has taken responsibility for three offences of fraud and two of false accounting arising from a scheme to dishonestly mislead the MoJ as to the true extent of the profits being made between 2010 and 2013 by its  parent company, Serco Ltd, from its contract for the provision of electronic monitoring services. The scheme was designed to prevent the MoJ from obtaining information to which it was entitled and from using this to decrease SL’s revenues under that contract.

A Deloitte spokesperson told Accountancy Daily: ‘We recognise and regret that our audit work on Serco Geografix Ltd in 2011 and 2012 was below the professional standards expected of us.

‘We have a programme of continuous improvement for our audit quality processes, which have evolved significantly since these audits were performed. We have also specifically agreed with the FRC certain actions focussed on learning lessons from the shortcomings in this audit work.’

Pat Sweet

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